G-20 Warns of Threats to Global Economic Recovery

Group of 20 leaders back more easy-money policies

WASHINGTON—The world’s top finance leaders warned Friday that currency volatility, low inflation and high debt levels threaten to undermine an already uneven global economic recovery, according to The Wall Street Journal. In an official statement after two days of meetings, finance ministers and central bankers from the Group of 20 largest economies backed more easy-money policies in wealthy nations as critical accelerants for growth.

“In many advanced economies, accommodative monetary policies are needed to anchor inflation expectations and support recovery,” the G-20 said. The G-20 affirmed its support for central-bank stimulus in Europe, Japan and the U.S. Officials are increasingly worried that the global economy could get stuck in a long period of anemic output, given a weak recovery in some rich countries and a slowdown in many of the largest emerging markets that have been key drivers of global growth.

The International Monetary Fund warned this past week that if the Federal Reserve raised short-term rates sooner or more quickly than markets anticipate, it could cause a rapid jump in longer-term interest rates and a whirlwind of volatility as investors adjust their portfolios across assets and markets. The IMF noted the large gap between the Fed’s expectations for rate increases and market expectations.

Renewed G-20 support for easy-money policies—essentially backing currency depreciation as a tool for promoting growth—underscores concern about the global economy getting stuck in a low-growth rut. It also marks an implicit acknowledgment of the failure across the globe to enact longer-lasting structural overhauls to major economies after years of relying on short-term spending and other temporary stimulus programs.

Treasury Secretary Jacob Lew, in a statement prepared for the IMF’s policy-setting committee, warned that long-standing efforts to rebalance the global economy are at risk given the reliance of key economies on exports. Some economies “appear increasingly dependent on external demand to boost growth, rather than pursuing more balanced policies to catalyze domestic demand,” Mr. Lew said. “We are concerned that the global economy is reverting to the precrisis pattern of heavy reliance on U.S. demand for growth.”

The dollar has surged in the past year as the U.S. economy has shown signs of strengthening and markets expect the Fed to raise rates. Combined with weak growth and aggressive easy-money policies in Europe and Japan, the U.S. currency has experienced one of the fastest and strongest surges in decades. Still, U.S. officials are concerned enough about a prolonged stagnation in its leading trading partners that they have encouraged easy-money policies overseas even though the subsequent dollar strengthening weighs on American exports and growth.

In its latest outlook published this week, the IMF said global economic growth will accelerate only marginally this year as slowing output in major emerging markets and a feeble expansion in wealthier countries drag down near-term prospects.

The low-growth worry is also trumping other risks fomenting in global markets amid the accelerating divergence in exchange-rate values and interest rates. For example, many emerging markets bulked up on dollar-denominated debt, a liability that increases with the rise of the dollar’s value, especially for emerging-market governments and firms whose revenue are in local currencies. Some countries have also pegged the value of their currencies to the dollar, damping their competitiveness and growth prospects.

Those competing pressures are putting authorities in policy binds, and could “trigger a cascade of disruptive adjustments,” the IMF said. The world’s top finance leaders warned Friday that currency volatility, low inflation and high debt levels threaten to undermine an already uneven global economic recovery. In an official statement after two days of meetings, finance ministers and central bankers from the Group of 20 largest economies backed more easy-money policies in wealthy nations as critical accelerants for growth.

“In many advanced economies, accommodative monetary policies are needed to anchor inflation expectations and support recovery,” the G-20 said. The G-20 affirmed its support for central bank stimulus in Europe, Japan and the U.S. Officials are increasingly worried that the global economy could get stuck in a long period of anemic output, given a weak recovery in some rich countries and a slowdown in many of the largest emerging markets that have been key drivers of global growth.

The International Monetary Fund warned this past week that if the Fed raised short-term rates sooner or more quickly than markets anticipate, it could cause a rapid jump in longer-term interest rates and a whirlwind of volatility as investors adjust their portfolios across assets and markets. The IMF noted the large gap between the Fed’s expectations for rate increases and market expectations.

Renewed G-20 support for easy money policies—essentially backing currency depreciation as a tool for promoting growth—underscores concern about the global economy getting stuck in a low-growth rut. It also marks an implicit acknowledgment of the failure across the globe to enact longer-lasting structural overhauls to major economies after years of relying on short-term spending and other temporary stimulus programs.

Treasury Secretary Jacob Lew warned that long-standing efforts to rebalance the global economy are at risk given the reliance of key economies on exports. Some economies “appear increasingly dependent on external demand to boost growth, rather than pursuing more balanced policies to catalyze domestic demand,” Mr. Lew told the IMF’s policy-setting committee. “We are concerned that the global economy is reverting to the precrisis pattern of heavy reliance on U.S. demand for growth.”

The dollar has surged in the past year as the U.S. economy has shown signs of strengthening and markets expect the Fed to raise rates. Combined with weak growth and aggressive easy-money policies in Europe and Japan, the greenback has experienced one of the fastest and strongest surges in decades.

Still, U.S. officials are concerned enough about a prolonged stagnation in its leading trading partners that they’ve encouraged easy-money policies overseas even though the subsequent dollar strengthening weighs on American exports and growth. In its latest outlook published this week, the IMF said global economic growth will accelerate only marginally this year as slowing output in major emerging markets and a feeble expansion in wealthier countries drag down near-term prospects.

The low-growth worry is also trumping other risks fomenting in global markets amid the accelerating divergence in exchange-rate values and interest rates. For example, many emerging markets bulked up on dollar-denominated debt, a liability that increases with the rise of the dollar’s value, especially for emerging-market governments and firms whose revenue are in local currencies. Some countries have also pegged the value of their currencies to the dollar, damping their competitiveness and growth prospects. Those competing pressures are putting authorities in policy binds, and could “trigger a cascade of disruptive adjustments,” the IMF said.